Moving the goal posts - the discount rate debate

Damages for successful Claimants in serious personal injury and clinical negligence cases could soon be dramatically increased, following confirmation from the Lord Chancellor, Ken Clarke, that he would reconsider the level of the discount rate in claims for personal injury compensation.

Damages for successful Claimants in serious personal injury and
clinical negligence cases could soon be dramatically increased,
following confirmation from the Lord Chancellor, Ken Clarke, that
he would reconsider the level of the discount rate in claims for
personal injury compensation.

Judicial Review?

At a time when the entire country is being asked by the
government to tighten its belts, the Association of Personal Injury
Lawyers (APIL) have called upon the Lord Chancellor to increase
compensation awards by altering the discount rate. The
discount rate is the mechanism by which compensation for future
financial losses is calculated. It appears that the move has
been prompted by a threat (by APIL) to judicially review the Lord
Chancellor if he did not undertake the reappraisal.

The Lord Chancellor will consult with the Treasury and other
bodies before making his decision. There is no date fixed for
the consultation and it could well take 6 months or more before the
decision is announced.

The Discount Rate Explained

The discount rate is a key part of assessing compensation in
serious personal injury and clinical negligence cases. It
represents the allowance which is made for the financial returns an
individual can achieve (over and above inflation) by investing his
or her compensation. Using it, courts can calculate the
current value of a loss which is not going to be incurred until
some point in the future.

In 1998, the discount rate had been set at 4.5%, but the current
discount rate was set by the Lord Chancellor at 2.5% in July 2001
and has not changed since. It was set based on the assumption
that it was possible for a successful Claimant to invest part of
his compensation in 2001, secure in the knowledge that such an
investment would increase in real terms by 2.5% each year until the
compensation was needed.

Claimants’ solicitors have been complaining for many years now
that the rate of 2.5% is unrealistic as investment returns from
‘safe’ investments do not get close to that figure. They
argue that it forces a Claimant to place his or her compensation
into more volatile investments in an attempt to retain its real
value. Their argument is that a Claimant should not have to
invest in anything more risky than Index Linked Government Stocks
(ILGS), a secure government backed investment vehicle which they
say currently pays about 0.5% to 1% above inflation.

Whilst it is undeniable that returns from ILGS have reduced in
recent years, there are three objections in principle to the
Claimants’ solicitors’ approach:

In these troubled financial times why should a Claimant be
placed in a much better position than the rest of society, whose
investments are subject to the variations of the market? Is
there any good reason why the rest of the taxpaying public should
be forced to ensure that a Claimant has greater protection than the
rest of society?

Research suggests that very few Claimants invest in ILGS, but
instead opt for higher reward/higher risk investments. Should
the award not reflect the reality of the steps a Claimant takes to
secure a return in excess of ILGS?

There has been significant historic volatility in the real rate
of return on investments over the past 12 years. If
compensation is to be assessed based on the very low rates of
return available at present (0.5% - 1%), there will be inevitable
over-compensation for Claimants if the rate of return
increases. By contrast, it is unlikely to get significantly
lower. All the risk therefore would lie with the
compensator.

The Effect of a Discount Rate Change

Were Ken Clarke to adopt a discount rate of 0.5%, the effect on
damages would be marked. By way of example, the lifetime
future losses for an 18 year old man would increase by 76% if the
discount rate were to shift by 2% (ie from 2.5% to 0.5%); the
multiplier for assessing future losses would increase from 32.07 to
56.55.

In one case recently heard in Guernsey (where the Lord
Chancellor’s decision on discount rates is not binding) the Court
of Appeal there increased the damages award from £9.5 million to
£14 million based on a (roughly) 2% shift in the discount rate.

The NHS has managed to protect itself from the worst effects of
discount rate changes by its use of periodical payments.
Periodical payments are means of ensuring that compensation for a
Claimant’s care and case management needs are paid annually in
December rather than in one lump sum at the date of settlement of
the claim. Those annual payments are increased based on the
salary increases for workers in the care industry.

However, the NHS is not immune to the change sought:

future losses (other than care and case management) will still
increase dramatically should a change in discount rate be
ordered

some Claimants may well decide that they would rather have the
money in their bank accounts than rely on the NHS to pay
compensation for care and case management on an annual basis.
With the present discount rate that is hardly an attractive option,
but with a significant change Claimants may alter their
approach.

In either case, the potential exists for large increases in the
contributions sought from Trusts to the NHSLA’s schemes. We
will have to await the Lord Chancellor’s decision to see how
serious the effect could be.

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The information on this website is of general interest about current legal issues and is not intended to apply to specific circumstances. It should not, therefore, be regarded as constituting legal advice.